Agencies

The Crypto Wild West Chaos Continues at FTX: Will the DCCPA Fix This?

Jack Atterberry, MJLST Staffer

The FTX Collapse and Its Implications

Over the last few weeks, the company FTX has imploded in what appears to be a massive scam of epic proportions. John Ray III, the former Enron restructuring leader who just took over FTX as CEO in their bankruptcy process, described FTX’s legal and bankruptcy situation as “worse than Enron” and a “complete failure of corporate control.”[1] FTX is a leading cryptocurrency exchange company that provided a platform on which customers could buy and sell crypto assets – similar to a traditional finance stock exchange. As of this past summer, FTX was worth $32 billion and served as a platform that global consumers trusted enough to deposit tens of billions of dollars in assets.[2]

Although FTX and its CEO Sam Bankman-Fried (“SBF”) engaged in numerous questionable and likely illegal business practices, perhaps the greatest fraudulent activity was intermingling customer deposits on the FTX exchange platform with assets from SBF’s asset management firm Alameda Research. Although facts are still being uncovered, preliminary investigations have highlighted that Alameda Research was using customer deposits in their trading and lending activities without customer consent – now customers face the unpleasant reality that their assets (in excess of $1 billion on aggregate) may never be returned.[3] While many lessons in corporate governance can be learned from the FTX situation, a key legal implication of the meltdown is that crypto has a regulatory problem that needs to be addressed by Congress and other US government agencies.

Current State of Government Regulation

Crypto assets are a relatively new asset class and have risen to prominence globally since the publishing of the Bitcoin white paper by the anonymous Satoshi Nakamoto in 2009.[4] Although crypto assets and the business activities associated with them are regulated in the United States, this regulation has been inconsistent and has created uncertainty for businesses and individuals in the ecosystem. Currently, the US Securities and Exchange Commission (“SEC”), state legislatures, the US Treasury, and a host of other government agencies have acted inconsistently. The SEC has inconsistently pursued enforcement actions, state governments have enacted differing digital assets laws, and the Treasury has banned crypto entities without clear rationale.[5] This has been a major problem for the industry and has led companies (including now infamously FTX) to move abroad to seek more regulatory certainty. Companies like FTX have chosen to domicile in jurisdictions like the Bahamas to avoid having to guess what approach various state governments and federal agencies will take with regard to its digital asset business activities.

Earlier in 2022, Congress introduced the Digital Commodities Consumer Protection Act (“DCCPA”) to attempt to fill gaps in the federal regulatory framework that oversees the crypto industry. The Digital Commodities Consumer Protection Act amends the Commodity Exchange Act to create a much-needed comprehensive and robust regulatory framework for spot markets of digital asset commodities. The DCCPA would enable the Commodity Futures Trading Commission (“CFTC”) to require digital asset commodity exchanges to actively prevent fraud and market manipulation, and would provide the CFTC regulatory authority to access quote and trade data allowing them to identify market manipulation more easily.[6] Taken as a whole, the DCCPA would implement consumer protections relating to digital asset commodities, ensure oversight of digital asset commodity platforms (such as FTX, Coinbase, etc.), and better prevent system risk to financial markets.[7] This regulation fills in a necessary gap in federal crypto regulation and industry observers are optimistic of its chances in getting passed as law.[8]

Digital Asset Regulation Has a Long Path Ahead

Despite the potential benefits and strong congressional regulatory action that the DCCPA represents, elements of the bill have been criticized by both the crypto industry and policy experts. According to the Blockchain Association, a leading crypto policy organization, the DCCPA could present negative implications for the decentralized finance (“DeFi”) ecosystem because of the onerous reporting and custody requirements that elements of the DCCPA would inflict on De-Fi protocols and applications[9]. “De-Fi” is a catch-all term for blockchain-based financial tools that allow users to trade, borrow, and loan crypto assets without third-party intermediaries.[10] The DCCPA attempts to regulate intermediary risks associated with digital asset trading whereas the whole point of De-Fi is to remove intermediaries through the use of blockchain software technology.[11] The Blockchain Association has also criticized the DCCPA as providing an overly broad definition for “digital commodity platform” and an overly narrow and ambiguous definition of “digital commodity” which could create future unnecessary turf wars between the SEC and CFTC.[12] When Congress revisits this bill next year, these complexities will likely be brought up in weighing the pros and cons of the bill. Besides the textual contents of the DCCPA, the legislators pushing forward the bill must also deal with the DCCPA’s negative association with Sam Bankman-Fried, the former FTX CEO. The former FTX CEO and suspected fraudster was perhaps the greatest supporter of the bill and lobbied for its provisions before Congress several times.[13] While Bankman-Fried’s support does not necessarily mean anything is wrong with the bill, some legislators and lobbyists may be hesitant to push forward a bill that was heavily influenced by a person who perpetrated a massive fraud scheme severely hurting thousands of consumers.

Though the goal of the DCCPA is to establish CFTC authority over crypto assets that qualify as commodities, the crypto ecosystem will still be left with several unanswered regulatory issues if it is passed. A key question is whether digital assets will be treated as commodities, securities or something else entirely. In addition, another key looming question is how Congress will regulate stablecoins—a type of digital asset where the price is designed to be pegged to another type of asset, typically a real-world asset such as US Treasury bills. For these unanswered questions Congress and the SEC will likely need to provide additional guidance and rules to build on the increased certainty that could be brought about with the DCCPA. By passing an amended version of the DCCPA with more careful attention paid to the De-Fi ecosystem as well as clarified definitions of digital commodities and digital commodity platforms, Congress would go a long way in the right direction to prevent future FTX-like fraud schemes, protect consumers, and ensure crypto innovation stays in the US.

Notes

[1] Ken Sweet & Michelle Chapman, FTX Is a Bigger Mess Than Enron, New CEO Says, Calling It “Unprecedented”, TIME (Nov. 17, 2022), https://time.com/6234801/ftx-fallout-worse-than-enron/

[2] FTX Company Profile, FORBES, https://www.forbes.com/companies/ftx/?sh=506342e23c59

[3] Osipovich et al., They Lived Together, Worked Together and Lost Billions Together: Inside Sam Bankman-Fried’s Doomed FTX Empire, WSJ (Nov. 19, 2022), https://www.wsj.com/articles/sam-bankman-fried-ftx-alameda-bankruptcy-collapse-11668824201

[4] Guardian Nigeria, The idea and a brief history of cryptocurrencies, The Guardian (Dec. 26, 2022), https://guardian.ng/technology/tech/the-idea-and-a-brief-history-of-cryptocurrencies/

[5] Kathryn White, Cryptocurrency regulation: where are we now, and where are we going?, World Economic Forum (Mar. 28, 2022), https://www.weforum.org/agenda/2022/03/where-is-cryptocurrency-regulation-heading/

[6] https://www.agriculture.senate.gov/imo/media/doc/Testimony_Phillips_09.15.2022.pdf

[7] US Senate Agriculture Committee, Crypto One-Pager: The Digital Commodities Consumer Protection Act Closes Regulatory Gaps, https://www.agriculture.senate.gov/imo/media/doc/crypto_one-pager1.pdf

[8] Courtney Degen, Washington wants to regulate cryptocurrency, Pensions & Investments (Oct. 3, 2022), https://www.pionline.com/cryptocurrency/washington-wants-regulate-crypto-path-unclear

[9] Jake Chervinsky, Blockchain Association Calls for Revisions to the Digital Commodities Consumer Protection Act (DCCPA), Blockchain Association (Sept. 15, 2022), https://theblockchainassociation.org/blockchain-association-calls-for-revisions-to-the-digital-commodities-consumer-protection-act-dccpa/

[10] Rakesh Sharma, What is Decentralized Finance (DeFi) and How Does It Work?, Investopedia (Sept. 21, 2022), https://www.investopedia.com/decentralized-finance-defi-5113835.

[11] Jennifer J. Schulpt & Jack Solowey, DeFi Must Be Defended, CATO Institute (Oct. 26, 2022), https://www.cato.org/commentary/defi-must-be-defended

[12] Jake Chervinsky, supra note 7.

[13] Fran Velasquez, Former SEC Official Doubts FTX Crash Will Prompt Congress to Act on Crypto Regulations, CoinDesk (Nov. 16, 2022), https://www.coindesk.com/business/2022/11/16/former-sec-official-doubts-ftx-crash-will-prompt-congress-to-act-on-crypto-regulations/


Twitter Troubles: The Upheaval of a Platform and Lessons for Social Media Governance

Gordon Unzen, MJLST Staffer

Elon Musk’s Tumultuous Start

On October 27, 2022, Elon Musk officially completed his $44 billion deal to purchase the social media platform, Twitter.[1] When Musk’s bid to buy Twitter was initially accepted in April 2022, proponents spoke of a grand ideological vision for the platform under Musk. Musk himself emphasized the importance of free speech to democracy and called Twitter “the digital town square where matters vital to the future of humanity are debated.”[2] Twitter co-founder Jack Dorsey called Twitter the “closest thing we have to a global consciousness,” and expressed his support of Musk: “I trust his mission to extend the light of consciousness.”[3]

Yet only two weeks into Musk’s rule, the tone has quickly shifted towards doom, with advertisers fleeing the platform, talk of bankruptcy, and the Federal Trade Commission (“FTC”) expressing “deep concern.” What happened?

Free Speech or a Free for All?

Critics were quick to read Musk’s pre-purchase remarks about improving ‘free speech’ on Twitter to mean he would change how the platform would regulate hate speech and misinformation.[4] This fear was corroborated by the stream of racist slurs and memes from anonymous trolls ‘celebrating’ Musk’s purchase of Twitter.[5] However, Musk’s first major change to the platform came in the form of a new verification service called ‘Twitter Blue.’

Musk took control of Twitter during a substantial pullback in advertisement spending in the tech industry, a problem that has impacted other tech giants like Meta, Spotify, and Google.[6] His solution was to seek revenue directly from consumers through Twitter Blue, a program where users could pay $8 a month for verification with the ‘blue check’ that previously served to tell users whether an account of public interest was authentic.[7] Musk claimed this new system would give ‘power to the people,’ which proved correct in an ironic and unintended fashion.

Twitter Blue allowed users to pay $8 for a blue check and impersonate politicians, celebrities, and company media accounts—which is exactly what happened. Musk, Rudy Giuliani, O.J. Simpson, LeBron James, and even the Pope were among the many impersonated by Twitter users.[8] Companies received the same treatment, with an impersonation Eli Lilly and Company account writing “We are excited to announce insulin is free now,” causing its stock to drop 2.2%.[9]This has led advertising firms like Omnicom and IPG’s Mediabrands to conclude that brand safety measures are currently impeded on Twitter and advertisers have subsequently begun to announce pauses on ad spending.[10] Musk responded by suspending Twitter Blue only 48 hours after it launched, but the damage may already be done for Twitter, a company whose revenue was 90% ad sales in the second quarter of this year.[11] During his first mass call with employees, Musk said he could not rule out bankruptcy in Twitter’s future.[12]

It also remains to be seen whether the Twitter impersonators will escape civil liability under theories of defamation[13] or misappropriation of name or likeness,[14] or criminal liability under state identity theft[15] or false representation of a public employee statutes,[16] which have been legal avenues used to punish instances of social media impersonation in the past.

FTC and Twitter’s Consent Decree

On the first day of Musk’s takeover of Twitter, he immediately fired the CEO, CFO, head of legal policy, trust and safety, and general counsel.[17] By the following week, mass layoffs were in full swing with 3,700 Twitter jobs, or 50% of its total workforce, to be eliminated.[18] This move has already landed Twitter in legal trouble for potentially violating the California WARN Act, which requires 60 days advance notice of mass layoffs.[19] More ominously, however, these layoffs, as well as the departure of the company’s head of trust and safety, chief information security officer, chief compliance officer and chief privacy officer, have attracted the attention of the FTC.[20]

In 2011, Twitter entered a consent decree with the FTC in response to data security lapses requiring the company to establish and maintain a program that ensured its new features do not misrepresent “the extent to which it maintains and protects the security, privacy, confidentiality, or integrity of nonpublic consumer information.”[21] Twitter also agreed to implement two-factor authentication without collecting personal data, limit employee access to information, provide training for employees working on user data, designate executives to be responsible for decision-making regarding sensitive user data, and undergo a third-party audit every six months.[22] Twitter was most recently fined $150 million back in May for violating the consent decree.[23]

With many of Twitter’s former executives gone, the company may be at an increased risk for violating regulatory orders and may find itself lacking the necessary infrastructure to comply with the consent decree. Musk also reportedly urged software engineers to “self-certify” legal compliance for the products and features they deployed, which may already violate the court-ordered agreement.[24] In response to these developments, Douglas Farrar, the FTC’s director of public affairs, said the commission is watching “Twitter with deep concern” and added that “No chief executive or company is above the law.”[25] He also noted that the FTC had “new tools to ensure compliance, and we are prepared to use them.”[26] Whether and how the FTC will employ regulatory measures against Twitter remains uncertain.

Conclusions

The fate of Twitter is by no means set in stone—in two weeks the platform has lost advertisers, key employees, and some degree of public legitimacy. However, at the speed Musk has moved so far, in two more weeks the company could likely be in a very different position. Beyond the immediate consequences to the company, Musk’s leadership of Twitter illuminates some important lessons about social media governance, both internal and external to a platform.

First, social media is foremost a business and not the ‘digital town square’ Musk imagines. Twitter’s regulation of hate speech and verification of public accounts served an important role in maintaining community standards, promoting brand safety for advertisers, and protecting users. Loosening regulatory control runs a great risk of delegitimizing a platform that corporations and politicians alike took seriously as a tool for public communication.

Second, social media stability is important to government regulators and further oversight may not be far off on the horizon. Musk is setting a precedent and bringing the spotlight on the dangers of a destabilized social media platform and the risks this may pose to data privacy, efforts to curb misinformation, and even the stock market. In addition to the FTC, Senate Majority Whip, and chair of the Senate Judiciary Committee, Dick Durbin, has already commented negatively on the Twitter situation.[27] Musk may have given powerful regulators, and even legislators, the opportunity they were looking for to impose greater control over social media. For better or worse, Twitter’s present troubles could lead to a new era of government involvement in digital social spaces.

Notes

[1] Adam Bankhurst, Elon Musk’s Twitter Takeover and the Chaos that Followed: The Complete Timeline, IGN (Nov. 11, 2022), https://www.ign.com/articles/elon-musks-twitter-takeover-and-the-chaos-that-followed-the-complete-timeline.

[2] Monica Potts & Jean Yi, Why Twitter is Unlikely to Become the ‘Digital Town Square’ Elon Musk Envisions, FiveThirtyEight (Apr. 29, 2022), https://fivethirtyeight.com/features/why-twitter-is-unlikely-to-become-the-digital-town-square-elon-musk-envisions/.

[3] Bankhurst, supra note 1.

[4] Potts & Yi, supra note 2.

[5] Drew Harwell et al., Racist Tweets Quickly Surface After Musk Closes Twitter Deal, Washington Post (Oct. 28, 2022), https://www.washingtonpost.com/technology/2022/10/28/musk-twitter-racist-posts/.

[6] Bobby Allyn, Elon Musk Says Twitter Bankruptcy is Possible, But is That Likely?, NPR (Nov. 12, 2022), https://www.wglt.org/2022-11-12/elon-musk-says-twitter-bankruptcy-is-possible-but-is-that-likely.

[7] Id.

[8] Keegan Kelly, We Will Never Forget These Hilarious Twitter Impersonations, Cracked (Nov. 12, 2022), https://www.cracked.com/article_35965_we-will-never-forget-these-hilarious-twitter-impersonations.html; Shirin Ali, The Parody Gold Created by Elon Musk’s Twitter Blue, Slate (Nov. 11, 2022), https://slate.com/technology/2022/11/parody-accounts-of-twitter-blue.html.

[9] Ali, supra note 8.

[10] Mehnaz Yasmin & Kenneth Li, Major Ad Firm Omnicom Recommends Clients Pause Twitter Ad Spend – Memo, Reuters (Nov. 11, 2022), https://www.reuters.com/technology/major-ad-firm-omnicom-recommends-clients-pause-twitter-ad-spend-verge-2022-11-11/; Rebecca Kern, Top Firm Advises Pausing Twitter Ads After Musk Takeover, Politico (Nov. 1, 2022), https://www.politico.com/news/2022/11/01/top-marketing-firm-recommends-suspending-twitter-ads-with-musk-takeover-00064464.

[11] Yasmin & Li, supra note 10.

[12] Katie Paul & Paresh Dave, Musk Warns of Twitter Bankruptcy as More Senior Executives Quit, Reuters (Nov. 10, 2022), https://www.reuters.com/technology/twitter-information-security-chief-kissner-decides-leave-2022-11-10/.

[13] Dorrian Horsey, How to Deal With Defamation on Twitter, Minc, https://www.minclaw.com/how-to-report-slander-on-twitter/ (last visited Nov. 12, 2022).

[14] Maksim Reznik, Identity Theft on Social Networking Sites: Developing Issues of Internet Impersonation, 29 Touro L. Rev. 455, 456 n.12 (2013), https://digitalcommons.tourolaw.edu/cgi/viewcontent.cgi?article=1472&context=lawreview.

[15] Id. at 455.

[16] Brett Snider, Can a Fake Twitter Account Get You Arrested?, FindLaw Blog (April 22, 2014), https://www.findlaw.com/legalblogs/criminal-defense/can-a-fake-twitter-account-get-you-arrested/.

[17] Bankhurst, supra note 1.

[18] Sarah Perez & Ivan Mehta, Twitter Sued in Class Action Lawsuit Over Mass Layoffs Without Proper Legal Notice, Techcrunch (Nov. 4, 2022), https://techcrunch.com/2022/11/04/twitter-faces-a-class-action-lawsuit-over-mass-employee-layoffs-with-proper-legal-notice/.

[19] Id.

[20] Natasha Lomas & Darrell Etherington, Musk’s Lawyer Tells Twitter Staff They Won’t be Liable if Company Violates FTC Consent Decree (Nov. 11, 2022), https://techcrunch.com/2022/11/11/musks-lawyer-tells-twitter-staff-they-wont-be-liable-if-company-violates-ftc-consent-decree/.

[21] Id.

[22] Scott Nover, Elon Musk Might Have Already Broken Twitter’s Agreement With the FTC, Quartz (Nov. 11, 2022), https://qz.com/elon-musk-might-have-already-broken-twitter-s-agreement-1849771518.

[23] Tom Espiner, Twitter Boss Elon Musk ‘Not Above the Law’, Warns US Regulator, BBC (Nov. 11, 2022), https://www.bbc.com/news/business-63593242.

[24] Nover, supra note 22.

[25] Espiner, supra note 23.

[26] Id.

[27] Kern, supra note 10.


Behind the “Package Insert”: Loophole in FDA’s Regulation of Off-Label Prescriptions

Yolanda Li, MJLST Staffer

FDA Regulation of Drug Prescription Labeling and the “Package Insert”

Over the recent years, constant efforts have been made towards regulating medical prescriptions in an attempt to reduce risks accompanied with drug prescriptions. Among those efforts is the FDA’s revision of the format of prescription drug information, commonly known as the “package insert”.[1]

The package insert regulation, effective since 2006, applies to all prescription drugs. The package insert is to provide up-to-date information on the drug in an easy-to-read format. One significant feature is a section named “highlights”, which provides the most important information regarding the benefits and risks of a prescribed medication. The highlights section is typically half a page in length providing a concise summary of information including “boxed warning”, “indications and usage”, and “dosage and administration”.[2] The highlights section also refers physicians to appropriate sections of the full prescribing information. In this way, the package insert aims to draw both the physicians’ and the patients’ attention to the prescription of a drug, consequently accomplishing the ultimate purpose of managing medication use and reducing medical errors. Mike Leavitt, the Health and Human Services Secretary of the FDA commented that the package insert “help[s] ensure safe and optimal use of drugs, which translates into better health outcomes for patients and more efficient delivery of healthcare.”[3]

FDA Regulation of Off-Label Prescription and the Emergence of a Loophole

The FDA’s regulations relating to the labeling of prescription drugs, although systematic in its form, are cut short to a certain extent due to its lack of regulation on off-label prescriptions. Off-label prescriptions do not refer to a physician prescribing non-FDA approved drugs, a common misunderstanding by the public. Rather, off-label prescriptions are those that do not conform to the FDA-approved use set out in the FDA-approved label.[4] More specifically, off-label prescription generally refers to: “(1) the practice of a physician prescribing a legally manufactured drug for purposes other than those indicated on that drug’s FDA mandated labeling; (2) using a different method of applying the treatment and prescribing a drug, device, or biologic to patient groups other than those approved by FDA; and (3) prescriptions for drug dosages that are different from the approved label-recommended dosage or for time periods exceeding the label-recommended usage.”[5] For example if Drug A’s use, as mandated by the FDA, is to treat chronic headaches, and a physician prescribes it to treat a patient’s sprained ankle, that is an off-label prescription. However, such practice is common as estimated by the American Medical Association (AMA).[6]

The commonly approach is that the FDA and courts do not to interfere with physicians’ off-label uses.[7] Thus, when the FDA regulates the labeling of approved uses but does not regulate prescriptions for off-label uses, a loophole is formed. Andrew von Eschenbach, M.D., claims that because the FDA’s package insert regulation makes it easier for physicians to get access to important information about drugs, including drug safety and benefits, this regulation helps physicians to have more meaningful discussions with patients.[8] However, physicians’ discretion in prescribing off-label prescriptions would offset the proposed benefit of the FDA regulation because the regulation remains as guidance without force of law once physicians choose to go off from FDA’s approved uses of drugs. The easy-to-understand feature of the package insert and its benefit for a patient’s understanding of the drug becomes futile when physicians exercise discretion and prescribe drugs for uses not written on the inserts. In sum, when a patient receives an off-label prescription, the insert provides them little benefit as it addresses benefits and risks related to a different use of the drug.

It is undisputed that drug manufacturers have less discretion regarding drug labeling than physicians. If a manufacturer included an off-label use on a drug’s label, and promoted the off-label use of the drug, the drug would be considered misbranded. The manufacturer would then be subject to liability[9] as manufacturing a misbranded product in interstate commerce is prohibited.[10] However, the effect of regulations on manufacturers still fail to eliminate the loophole in off-label prescription: in response to the regulations, the manufacturer usually receives FDA approval for only a few drug uses and then relies on physicians prescribing off-label uses to ensure their profitability.[11] In this way, the manufacturer avoids liability under regulation and furthers the loophole in off-label prescription by encouraging physicians to prescribe more off-label uses in order to expand the manufacturer’s market.[12]

Why are Off-Label Prescriptions Difficult to Regulate?

One of the main reasons behind the lack of regulation of off-label prescriptions is the FDA’s objective in ensuring effective delivery of health care. Physicians are encouraged to use discretion and judgment in order to tailor prescription to patients’ individual conditions.[13] Another reason is to increase efficiency in treatments by avoiding the lengthy FDA approval process.[14] Aspirin was widely prescribed to reduce the risk of heart attack long before it was FDA-approved for this purpose; off-label prescriptions have also been proven effective in treatment of cancer, and off-label therapies have prolonged the lives of AIDS patients.[15] Another concern is drug prices in the United States, and promoting off-label uses has been found to help reduce drug prices as increased sales volume enables drug companies to lower their prices.[16] Indeed, off-label prescription has become a mainstream of medicine: “the FDA has long tolerated off-label drug use and has disclaimed any interest in regulating physicians’ prescribing practices.”[17] Today it is unclear whether the agency even has jurisdiction to regulate off-label prescription of drugs.[18]

In sum, there is clear guidance on the labeling of prescription drugs as a result of FDA regulation. However, because of difficulties in enforcement, the custom and widely accepted practice of off-label prescriptions and the inherent benefit of off-label prescription, the effects of the regulation are not as effective as what was firstly planned and proposed.

Notes

[1] The FDA Announces New Prescription Drug Information Format, U.S. Food & Drug Adm’ (Dec. 04 2015) https://www.fda.gov/drugs/laws-acts-and-rules/fda-announces-new-prescription-drug-information-format.

[2] Id.

[3] Id.

[4] Margaret Z. Johns, Informed Consent: Requiring Doctors to Disclose Off-Label Prescriptions and Conflicts of Interest, 58 Hastings L.J. 967, 968 https://plus.lexis.com/document?crid=35364c11-2939-4e58-bceb-dab7ae8f0154&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A4P0W-GY20-00CW-906B-00000-00&pdsourcegroupingtype=&pdcontentcomponentid=7341&pdmfid=1530671&pdisurlapi=true.

[5] Lisa E. Smilan, The off-label loophole in the psychopharmacologic setting: prescription of antipsychotic drugs in the nonpsychotic patient population, 30 Health Matrix 233, 240 (2020), https://plus.lexis.com/document/?pdmfid=1530671&crid=367cf8ad-295e-4f14-97fa-737618718d61&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A64BT-RR31-JWBS-61KV-00000-00&pdworkfolderid=5506aeec-9540-4837-89f0-5a1acfd81d8b&pdopendocfromfolder=true&prid=1d42abd0-b66e-43af-a61a-0d1fb94180f5&ecomp=gdgg&earg=5506aeec-9540-4837-89f0-5a1acfd81d8b#.

[6] Supra note 4.

[7] Sigma-Tau Pharms. v. Schwetz, 288 F.3d 141, 148, https://plus.lexis.com/document?crid=7d2a2b00-13ad-4953-968e-82a28724aa00&pddocfullpath=%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A45RF-5H50-0038-X1PB-00000-00&pdsourcegroupingtype=&pdcontentcomponentid=6388&pdmfid=1530671&pdisurlapi=true.

[8] Supra note 1.

[9] 21 CFR 201.5, https://plus.lexis.com/document/?pdmfid=1530671&crid=e02a99fb-be65-4525-b83c-a167f3e21b93&pddocfullpath=%2Fshared%2Fdocument%2Fadministrative-codes%2Furn%3AcontentItem%3A603K-BXD1-DYB7-W30Y-00000-00&pdcontentcomponentid=5154&pdworkfolderlocatorid=NOT_SAVED_IN_WORKFOLDER&prid=ff2b7e20-9dab-49b0-8385-627c16ee0ba2&ecomp=vfbtk&earg=sr2.

[10] 21 CFR 801.4, https://plus.lexis.com/document/?pdmfid=1530671&crid=721a586d-52a4-4228-b0c3-c464a77d6e6a&pddocfullpath=%2Fshared%2Fdocument%2Fadministrative-codes%2Furn%3AcontentItem%3A638R-X4S3-GXJ9-32FV-00000-00&pdcontentcomponentid=5154&pdworkfolderlocatorid=NOT_SAVED_IN_WORKFOLDER&prid=ff2b7e20-9dab-49b0-8385-627c16ee0ba2&ecomp=vfbtk&earg=sr6.

[11]  Supra note 4.

[12] Id.

[13]   Supra note 7.

[14]   Supra note 4.

[15]  Id.

[16] Supra note 4, at 981.

[17] ​​Kaspar J. Stoffelmayr, Products Liability And “Off-label” Uses Of Prescription Drugs, 63 U. Chi. L. Rev. 275, 279, https://plus.lexis.com/document?crid=a2181ffc-7f3e-4bce-b82e-08ba9111194f&pddocfullpath=%2Fshared%2Fdocument%2Fanalytical-materials%2Furn%3AcontentItem%3A3S3V-4CF0-00CV-K03W-00000-00&pdsourcegroupingtype=&pdcontentcomponentid=7358&pdmfid=1530671&pdisurlapi=true.

[18]  Id.


Beef (and Residual Hormones?). It’s What’s for Dinner.

Kira Le, MJLST Staffer

The beef industry in the United States has been using hormones, both natural and synthetic, to increase the size of cattle prior to slaughter for more than a century.[1] Capsules are implanted under the skin behind a cow’s ear and release specific doses of hormones over a period of time with the goal of increasing the animal’s size more quickly. Because the use of these hormones in the beef industry involves both drug regulation and food safety regulations, both the U.S. Food and Drug Administration (FDA) and the United States Department of Agriculture (USDA) are responsible for ensuring the safety of the practice and regulating its use.[2] According to the FDA, “scientific data” is used to establish “acceptable” safe limits for hormones in meat by the time it is consumed.[3] Agricultural science experts support the fact that the naturally-occurring hormones used in beef production, such as estrogen, are used in amounts much smaller than those that can be found in other common foods, such as eggs and tofu.[4] However, the debate within the scientific community, and between jurisdictions that allow the sale of hormone-treated beef (such as the United States) and those that have banned its importation (such as the European Union), is still raging on in 2022 and has led to significant distrust in the beef industry by consumers.[5] With the release of research earlier this year presenting opposing conclusions regarding the safety of the use of synthetic hormones in the beef industry, the FDA has a responsibility to acknowledge evidence suggesting that such practices may be harmful to human health.

Some defend the use of hormones in the beef industry as perfectly safe and, at this point, necessary to sustainably feed a planet on which the demand for meat continues to increase with a growing population. Others, such as the European Union and China, both of which have restricted the importation of beef from cattle implanted with growth-promoting hormones, argue that the practice threatens human health.[6] For example, a report out of Food Research Collaboration found that a routinely-used hormone in United States beef production posed a significant risk of cancer.[7] Such a finding is reminiscent of when, in the not-too-distant past, known carcinogen diethylstilbestrol (DES) was used in U.S. cattle production and led to dangerous meat being stocked on grocery store shelves.[8]

This year, research published in the Journal of Applied Animal Research discussed the effects that residual hormones left in beef and the environment have on human health in the United States.[9] Approximately 63% of beef cattle in the United States are implanted with hormones, most of which are synthetic.[10] Despite organizations and agencies such as the FDA assuring consumers that the use of these synthetic hormones in cattle production is safe, the residues that can be left behind may be carcinogenic and/or lead to reproductive or developmental issues in humans.[11] Furthermore, the National Residue Program (NRP), housed in the USDA, is not only the “only federal effort that routinely examines food animal products for drug residues,” but also only examines tissues not commonly consumed, such as the liver and kidney.[12] Researchers Quaid and Abdoun offer the example of Zeranol, a genotoxic synthetic hormone used in beef production in the United States that activates estrogen receptors, causing dependent cell proliferation in the mammary glands that may result in breast cancer.[13] They also noted the problem of residual hormones found in the environment surrounding cattle production locations, which have been found to reduce human male reproductive health and increase the risk of some endocrine cancers.[14]

Also this year, researchers published an article in the Journal of Animal Science claiming that despite the “growing concern” of the effects of residual hormones on human health, including the earlier onset of puberty in girls and an increase in estrogen-related diseases attributed to the excessive consumption of beef, research shows that cattle treated with hormones, “when given at proper administration levels, do not lead to toxic or harmful levels of hormonal residues in their tissues.”[15] The researchers concluded that the hormones have no effect on human health and are not the cause of disease.[16]

Perhaps it is time for the FDA to acknowledge and address the scientific disagreements on the safety of the use of hormones – synthetic hormones, especially – in beef production, as well as reassure consumers that players in the agriculture industry are abiding by safety regulations. Better yet, considering the currentness of the research, the inconsistency of the conclusions, and the seriousness of the issue, formal hearings – held by either the FDA or Congress – may be necessary to rebuild the trust of consumers in the U.S. beef industry.

Notes

[1] Synthetic Hormone Use in Beef and the U.S. Regulatory Dilemma, DES Daughter (Nov. 20, 2016), https://diethylstilbestrol.co.uk/synthetic-hormone-use-in-beef-and-the-us-regulatory-dilemma/.

[2] Id.

[3] Steroid Hormone Implants Used for Growth in Food-Producing Animals, U.S. Food and Drug Admin (Apr. 13, 2022), https://www.fda.gov/animal-veterinary/product-safety-information/steroid-hormone-implants-used-growth-food-producing-animals.

[4] Amanda Blair, Hormones in Beef: Myths vs. Facts, S.D. State Univ. Extension (July 13, 2022), https://extension.sdstate.edu/hormones-beef-myths-vs-facts.

[5] See Julia Calderone, Here’s Why Farmers Inject Hormones Into Beef But Never Into Poultry, Insider (Mar. 31, 2016), https://www.businessinsider.com/no-hormones-chicken-poultry-usda-fda-2016-3 (discussing the debate within the scientific community over whether the use of hormones in animals raised for human consumption is a risk to human health).

[6] New Generation of Livestock Drugs Linked to Cancer, Rafter W. Ranch (June 8, 2022), https://rafterwranch.net/livestock-drugs-linked-to-cancer/.

[7] Id.

[8] Synthetic Hormone Use in Beef and the U.S. Regulatory Dilemma, DES Daughter (Nov. 20, 2016), https://diethylstilbestrol.co.uk/synthetic-hormone-use-in-beef-and-the-us-regulatory-dilemma/.

[9] Mohammed M. Quaid & Khalid A. Abdoun, Safety and Concerns of Hormonal Application in Farm Animal Production: A Review, 50 J. of Applied Animal Rsch. 426 (2022).

[10] Id. at 428.

[11] Id. at 429–30.

[12] Id. at 430.

[13] Id. at 432–33.

[14] Id. at 435.

[15] Holly C. Evans et al., Harnessing the Value of Reproductive Hormones in Cattle Production with Considerations to Animal Welfare and Human Health, 100 J. of Animal Sci. 1, 9 (2022).

[16] Id.


New Congressional Bill to Fuel the Crypto Winter?

Shawn Zhang, MJLST Staffer

Cryptocurrency has experienced rapid growth over the past few years. Retail investors rushed into this market in hopes of amassing wealth. However, the current price of Bitcoin is sitting at roughly 30% of the all-time high. Investors dub this current state of the market as the “Crypto Winter”, where the entire crypto market is underperforming. This term signifies the current negative sentiment held by a large portion of the market towards cryptocurrency.

Cryptocurrency is a relatively new class of assets, bearing similarities to both currency and securities. Regulators are not quite sure of how to regulate this volatile market, and with the lack of regulations investors are more prone to risk. Nevertheless, legislators are still seeking to protect retail investors and the general public from risky investments, as they did with the 1933 Securities Act and 1934 Securities Exchange Act. The question is how? Well, the answer may be The Lummis-Gillibrand Responsible Financial Innovation Act which has recently been introduced into Congress. This bill seeks to “provide for responsible financial innovation and to bring digital assets within the regulatory perimeter.” If passed, this bill would address those concerns investors currently have with investing in the volatile crypto market.

Summary of the Bill

This legislation would set up the regulatory landscape by granting the Commodity Futures Trading Commission (CFTC) exclusive jurisdiction over digital assets, subject to several exclusions. One of the exclusions being that when the asset is deemed a security, the Securities and Exchange Commission (SEC) will gain jurisdiction and providers of digital asset services will then be required to provide disclosures. The bill would also require the Internal Revenue Service to issue regulations clarifying issues of digital assets and eliminate capital gains taxes through a de minimis exclusion for cryptocurrencies used to buy up to $200 of goods and services per transaction. Moreover, it would also allow crypto miners to defer income taxes on digital assets earned while mining or staking until they dispose of the assets.

Commodity vs Security

So, what’s the difference between CFTC and SEC? The CFTC governs commodities and derivatives market transactions, while the SEC governs securities. The key difference that these classifications make are the laws under which they operate. The CFTC was created under the 1936 Commodities Exchange Act, while the SEC was created under the 1933 Securities Act and 1934 Securities Exchange Act. Hence, giving the CFTC primary jurisdiction means that cryptocurrency will primarily be governed under the 1936 Commodity Exchange Act. The biggest advantage (or what one may think of as a disadvantage) of this Act is that commodities are generally more lightly regulated than securities. Under the 33’ act and 34’ act, securities are thoroughly regulated via disclosures and reports to protect the public. Issuers of securities must comply with a large set of regulations (which is why IPOs are expensive). This could be a win for crypto, as crypto was intended to be “decentralized” rather than heavily regulated. Though having some regulations may help invoke public trust in this class of assets and potentially increase the total number of investors, which may be a bigger win.

The question ends up being what level of regulation and protection is appropriate? On the one hand, applying heavy handed regulations may not be effective, and in fact might encourage black market activity. This may lead to tech savvy investors detaching their real life identity from the world of crypto and using their money elsewhere through the blockchain networks. On the other hand, investors hate uncertainty. Markets react badly when there is “fear, uncertainty, and doubt.” By solidifying the jurisdiction of CFTC on cryptocurrency, both investors and issuers may feel more at ease rather than wonder what regulations they must follow. As a comparison, oil, gold, and futures are also regulated by the CFTC rather than the SEC, and they seem to be doing fine on the exchanges.

Tax Clarifications & Incentives

Clarifications are always welcome in the complex world of federal taxes. Uncertainty can result in investors avoiding a class of assets purely due to the complexity of its tax consequences. Moreover, investors may be unexpectedly hit with a tax bill that was different from what they expected due to ambiguity or lack of clarity in the statutes. Thus, clarifications under the proposed Act would likely make lives easier for investors in this space.

Tax often incentivizes certain investor actions. For example, capital gains tax incentivizes investors to hold their investments for longer than a year in order to reduce their taxes. Tax incentives also often have policy rationales behind them, like the capital gain tax incentive aims to promote long term investment rather than short term speculation. This indirectly protects investors from short term fluctuations in the market, and also keeps more money in the economy for longer.

The proposed Act would eliminate capital gains tax for crypto used to purchase goods and services up to $200. That’s $200 of untaxed money that could be spent without increasing an investor’s tax liability. This would likely encourage people to conduct at least some transactions in crypto, and thus further legitimize the asset class. People often doubt the real world use of cryptocurrencies, but if this Act can encourage people to utilize and accept cryptocurrencies in everyday transactions, it may increase confidence in the asset class.

Conclusion

The Lummis-Gillibrand Responsible Financial Innovation Act could be a big step towards further adoption and legitimization of crypto. Congress giving primary jurisdiction to the CFTC is likely the better choice, as it strikes a balance between protecting consumers while not having too much regulation. Regardless of whether this will have a positive impact on the current market or not, Congress is at least finally signaling that they do see Crypto as a legitimate class of asset.


It’s Social Media – A Big Lump of Unregulated Child Influencers!

Tessa Wright, MJLST Staffer

If you’ve been on TikTok lately, you’re probably familiar with the Corn Kid. Seven-year-old Tariq went viral on TikTok in August after appearing in an 85-second video clip professing his love of corn.[1] Due to his accidental viral popularity, Tariq has become a social media celebrity. He has been featured in content collaborations with notable influencers, starred in a social media ad for Chipotle, and even created an account on Cameo.[2] At seven-years-old, he has become a child influencer, a minor celebrity, and a major financial contributor for his family. Corn Kid is not alone. There are a growing number of children rising to fame via social media. In fact, today child influencers have created an eight-billion-dollar social media advertising industry, with some children generating as much as $26 million a year through advertising and sponsored content.[3] Yet, despite this rapidly growing industry, there are still very few regulations protecting the financial earnings of children entertainers in the social media industry.[4]

What Protects Children’s Financial Earnings in the Entertainment Industry?

Normally, children in the entertainment industry have their financial earnings protected under the California Child Actor’s Bill (also known as the Coogan Law).[5] The Coogan Law was passed in 1939 by the state of California in response to the plight of Jackie Coogan.[6] Coogan was a child star who earned millions of dollars as a child actor only to discover upon reaching adulthood that his parents had spent almost all of his money.[7] Over the years the law has evolved, and today it upholds that earnings by minors in the entertainment industry are the property of the minor.[8] Specifically, the California law creates a fiduciary relationship between the parent and child and requires that 15% of all earnings must be set aside in a blocked trust.[9]

What Protections do Child Social Media Stars Have? 

Social media stars are not legally considered to be actors, so the Coogan Law does not apply to their earnings.[10] So, are there other laws protecting these social media stars? The short answer is, no. 

Technically, there are laws that prevent children under the age of 12 from using social media apps which in theory should protect the youngest of social media stars.[11] However, even though these social media platforms claim that they require users to be at least thirteen years old to create accounts on their platforms, there are still ways children end up working in content creation jobs.[12] The most common scenario is that parents of these children make content in which they feature their children.[13] These “family vloggers” are a popular genre of YouTube videos where parents frequently feature their children and share major life events; sometimes they even feature the birth of their children. Often these parents also make separate social media accounts for their children which are technically run by the parents and are therefore allowed despite the age restrictions.[14] There are no restrictions or regulations preventing parents from making social media accounts for their children, and therefore no restriction on the parents’ collection of the income generated from such accounts.[15]

New Attempts at Legislation 

So far, there has been very little intervention by lawmakers. The state of Washington has attempted to turn the tide by proposing a new state bill that attempts to protect children working in social media.[16] The bill was introduced in January of 2022 and, if passed, would offer protection to children living within the state of Washington who are on social media.[17] Specifically, the bill introduction reads, “Those children are generating interest in and revenue for the content, but receive no financial compensation for their participation. Unlike in child acting, these children are not playing a part, and lack legal protections.”[18] The bill would hopefully help protect the finances of these child influencers. 

Additionally, California passed a similar bill in 2018.[19] Unfortunately, it only applies to videos that are longer than one hour and have direct payment to the child.[20] What this means is that a child who, for example, is a Twitch streamer that posts a three-hour livestream and receives direct donations during the stream, would be covered by the bill; however, a child featured in a 10-minute YouTube video or a 15-second TikTok would not be financially protected under the bill.

The Difficulties in Regulating Social Media Earnings for Children

Currently, France is the only country in the world with regulations for children working in the social media industry.[21] There, children working in the entertainment industry (whether as child actors, models, or social media influencers) have to register for a license and their earnings must be put into a dedicated bank account for them to access when they’re sixteen.[22] However, the legislation is still new and it is too soon to see how well these regulations will work. 

The problem with creating legislation in this area is attributable to the ad hoc nature of making social media content.[23] It is not realistic to simply extend existing legislation applicable to child entertainers to child influencers[24] as their work differs greatly. Moreover, it becomes extremely difficult to attempt to regulate an industry when influencers can post content from any location at any time, and when parents may be the ones filming and posting the videos of their children in order to boost their household income. For example, it would be hard to draw a clear line between when a child is being filmed casually for a home video and when it is being done for work, and when an entire family is featured in a video it would be difficult to determine how much money is attributable to each family member. 

Is There a Solution?

While there is no easy solution, changing the current regulations or creating new regulations is the clearest route. Traditionally, tech platforms have taken the view that governments should make rules and then they will then enforce them.[25] All major social media sites have their own safety rules, but the extent to which they are responsible for the oversight of child influencers is not clearly defined.[26] However, if any new regulation is going to be effective, big tech companies will need to get involved. As it stands today, parents have found loopholes that allow them to feature their child stars on social media without violating age restrictions. To avoid these sorts of loopholes to new regulations, it will be essential that big tech companies work in collaboration with legislators in order to create technical features that prevent them.

The hope is that one day, children like Corn Kid will have total control of their financial earnings, and will not reach adulthood only to discover their money has already been spent by their parents or guardians. The future of entertainment is changing every day, and the laws need to keep up. 

Notes

[1] Madison Malone Kircher, New York Times (Online), New York: New York Times Company (September 21, 2022) https://www.nytimes.com/2022/09/21/style/corn-kid-tariq-tiktok.html.

[2] Id.

[3] Marina Masterson, When Play Becomes Work: Child Labor Laws in the Era of ‘Kidfluencers’, 169 U. Pa. L. Rev. 577, 577 (2021).

[4] Coogan Accounts: Protecting Your Child Star’s Earnings, Morgan Stanley (Jan. 10, 2022), https://www.morganstanley.com/articles/trust-account-for-child-performer.

[5] Coogan Law, https://www.sagaftra.org/membership-benefits/young-performers/coogan-law (last visited Oct. 16, 2022).

[6] Id.

[7] Id.

[8] Cal. Fam. Code § 6752.

[9] Id.

[10] Morgan Stanley, supra note 4.

[11] Sapna Maheshwari, Online and Making Thousands, at Age 4: Meet the Kidfluencers, N.Y. Times, (March 1, 2019) https://www.nytimes.com/2019/03/01/business/media/social-media-influencers-kids.html.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Katie Collins, TikTok Kids Are Being Exploited Online, but Change is Coming, CNET (Aug. 8, 2022 9:00 AM), https://www.cnet.com/news/politics/tiktok-kids-are-being-exploited-online-but-change-is-coming/.

[17] Id.

[18] Id.

[19] E.W. Park, Child Influencers Have No Child Labor Regulations. They Should, Lavoz News (May 16, 2022) https://lavozdeanza.com/opinions/2022/05/16/child-influencers-have-no-child-labor-regulations-they-should/.

[20] Id.

[21] Collins, supra note 19.

[22] Id.

[23] Id.

[24] Id.

[25] Id.

[26] Katie Collins, TikTok Kids Are Being Exploited Online, but Change is Coming, CNET (Aug. 8, 2022 9:00 AM), https://www.cnet.com/news/politics/tiktok-kids-are-being-exploited-online-but-change-is-coming/.


Making Moves on Marijuana: President Biden and Minnesota Update Marijuana Laws in 2022

Emma Ehrlich, MJLST Staffer

Federal Pardoning 

Earlier this month, President Biden announced that he would be pardoning anyone with a federal conviction due to simple marijuana possession charges. This will affect approximately 6,500 people on the federal level, plus thousands of others who were convicted in the District of Columbia. However, this pardon does not cover anyone involved in the actual sale of marijuana or anyone convicted under state possession laws, meaning it affects only a subsection of those who have been convicted of marijuana related charges. The administration’s goal was to give a clean slate to those who were struggling to find housing or employment due to a possession charge, and to encourage state legislatures to do the same. 

The second half of President Biden’s announcement was to task the Attorney General with reviewing the federal government’s categorization of marijuana as a Schedule 1 drug, which President Biden pointed out is currently the same categorization as heroin. Drugs are supposed to be assigned to schedules based on their medical uses and addictive qualities. The Drug Enforcement Agency (“DEA”) currently categorizes marijuana as a “drug[] with no currently accepted medical use and a high potential for abuse.” The U. S. Food and Drug Administration (“FDA”) explains on their website, almost in a regretful tone, that only four cannabis drugs have been approved by the FDA, one containing CBD and the other three containing synthetically derived THC. This categorization issue is not new, but because legislation regarding marijuana is changing rapidly federal agencies have had to play catch up with the law.  

Minnesota and Beyond 

Meanwhile, the state of Minnesota is still chugging along in terms of marijuana legalization. In July of this year, the state of Minnesota legalized the production and sale of edibles containing 5-mg of THC, which can now be purchased by adults in bags containing no more than 50-mg of THC. This sounds like good news, but many state residents are baffled at the lack of a tax provision in the new state law. The University of Maryland actually did a study on Minnesota’s potential for taxing cannabis, and determined that if the newly legalized edibles were taxed at the same rate as Michigan taxes, the state could have collected over $40 million. Given this high estimate, it is not out of the question that a tax on marijuana will be implemented in the future. 

Minnesotan employers were similarly not thrilled when the law passed as they felt ill equipped to update their drug policies. Employers “can bar workers from using, possessing, and being under the influence of THC during work hours or in the workplace,” as well as conduct “random drug testing for safety-sensitive positions” and “employees suspected of being intoxicated.” The gray area exists in the employer’s ability to hire and fire based on an applicant or employee’s use of marijuana outside of work. It is currently illegal to make hiring and firing decisions based on tobacco usage or alcohol consumption, and it is unclear if marijuana will be treated in the same manner. The added layer to marijuana testing is that a positive drug test for marijuana does not mean an employee consumed THC right before work since THC lingers in the body for so long. Thus, an employee could test positive for mairjuana at work even if they had used the drugs days ago and were no longer feeling its effects. Though the employee would have ingested the drug legally, they may not be considered for a job position or could be fired from a job they already hold. This is the type of issue that has led a number of municipalities in Minnesota to put a pause on the sale of the state legalized edibles. In contrast, California passed a law just last month protecting employees, apart from some exceptions, from being discriminated against based on their marijuana usage when not at work. What might be a little concerning is that California made recreational marijuana legal in 2016, and this law won’t go into effect until 2024, meaning there was an eight year gap in the legislation. Regardless, this may serve as the beginning of a pattern, pointing to what Minnesota may do down the line. 

In 2020 New Jersey passed a law legalizing recreational marijuana use which went into effect in April of this year. Similarly to California, part of the law protects workers from being discriminated against because of their marijuana use outside of work. However, Walmart and Sam’s Club have continued to administer drug tests to job applicants to search for traces of marijuana, a practice that has gotten them into legal trouble in New Jersey. Walmart is arguing that only the state Cannabis Regulatory Commission can enforce the new employment law, and that this case should be dismissed because it was brought by individuals. Courts in other states in which similar laws have been passed have issued decisions that oppose Walmart’s position, ruling that individual workers can sue under the law. It seems that Minnesota is not the only state that has enacted fuzzy recreational drug use laws that directly affect employers and employees. 

On the bright side of this employment confusion, many appreciate the baby step the Minnesota legislature has taken to legalize marijuana use. The state has been in dire need of updated marijuana legislation, and the hope is that continuing this legalization process will lessen the disparities between black and white arrests for marijuana possession. This change is necessary, because as of 2020 Minnesota was found to rank 8th in the United States for largest racial disparities in marijuana possession arrests. In 2021, the Minnesota Bureau of Criminal Apprehension released data showing that out of the over 6,000 marijuana related arrests made in the state, 90% were for simple possession charges, and a black person was almost five times more likely to be arrested for these types of charges than a white person. This statistic is down from almost eight times more likely back in 2010, but is still extremely present. 

In Conclusion

President Biden’s pardon is just a beginning step towards moving the US forward on marijuana legislation. Though states such as Minnesota are moving in the right direction by gradually legalizing recreational marijuana use, the laws are often unclear and lead to a multitude of logistical issues like those seen in the employment sector. Regardless, making continued progress is important to the U.S. for many reasons and is crucial for helping to lessen racial arrest disparities. Hopefully this pardon will have the effect the administration aimed for and will encourage more state legislatures to update their policies on marijuana usage.

 

 


The Ongoing Battle Between Intuit and the IRS—And How Taxpayers Are Caught in the Crossfire

Alex Zeng, MJLST Staffer

Every April 15, taxpayers scramble to get their tax documents sorted and figure out what, where, and how to file. This hopeless endeavor is exacerbated by the length and complexity of the tax code making it nigh indecipherable to the average taxpayer, the IRS only answering roughly nine to ten percent of the calls that it receives, and the fact that many IRS processes slog on for months before delivering an output. Consequently, it is almost no surprise that the Treasury Department, which interacts with the public primarily through the IRS, was ranked dead last in a recent customer satisfaction survey analyzing 96,211 US consumers’ perceptions of 221 companies and federal agencies. 

Responding to this crisis, the IRS has decided that it should provide a free, government-backed tax filing system. Under the Inflation Reduction Act, the IRS was given $15 million to study making its own digital tax filing platform. The concept is simple: by developing their own technology to handle tax filings, the IRS would be consolidating tax assessment and tax filings within one entity, thereby increasing customer satisfaction and efficiency within the system. After all, this sort of program already exists in California and its adoption is ostensibly paying dividends. The state’s program, CalFile, is a government-backed tax filing system that is free to single filers making up to $169,730 and married filers making up to $339,464 a year. The California Franchise Tax Board (“CFTB”) reports that CalFile saves taxpayers somewhere between $4 million and $10 million annually in tax preparation fees while the state saves around $500,000 in overhead and administrative costs. 

To many, this change is long overdue. It seemed obvious that the agency that requires tax filings should have its own system to file taxes. The question then becomes: what took so long? 

The History of Free Tax Filing 

To taxpayers that engage with the morass of tax every year, services such as TurboTax and H&R Block seem like godsends as they provide the opportunity to file with ease and near certainty of accuracy for a fee. Beneath this masquerade of doing good, however, lies these services’ sinister secret: they are responsible for the absence of a free government-backed filing service. For decades, companies such as Intuit have been closing the door to more accessible filing through aggressive lobbying and by tapping into taxpayers’ fear, uncertainty, and doubt about the tax filing process as part of their marketing strategy. 

In an effort to suppress government encroachment into the tax filing industry, Intuit and other industry giants formed the Free File Alliance (“FFA”) in the early 2000s and agreed to provide free federal filing to 60 percent of taxpayers at the time of drafting as long as the IRS promised not to compete with the industry. Though the Free File Alliance introduced free filing, fewer than three percent of all taxpayers use these services despite a seventy percent eligibility rate. This discrepancy is due to various barriers of entry, such as intentionally hiding their free tax filing services from search engines, reducing the income cap eligibility, and confusing taxpayers by having two separate services designated as “Free” and “Free File.” After ProPublica published articles investigating the industry’s deceptive tactics, the IRS and the FFA amended their agreement to bar companies from hiding their free products from search engines and struck the provision prohibiting the IRS from competing with the industry by introducing its own tax filing service. 

Potential Pitfalls for the IRS’s Free Filing System 

While the way towards an IRS-backed tax filing system may seem clear now that the provision preventing the IRS from developing one is stricken, there are still some obstacles that the IRS must surmount before its promulgation. One concern is that if the IRS follows through, then the IRS would be both the preparer and the auditor. This conflict of interest may introduce issues regarding whether a taxpayer can reasonably expect that the same agency that computes taxes and collects them is able to fairly consider objections to potential errors and return overpayments. 

Adjacent to this concern is that if the agency consolidates too much power and discretion within itself, private companies would languish under the regime of Big Brother as private interests and services are replaced by the government. Proponents of private companies dictating the boundaries of free tax filing services contend that if the government steps in, private companies, and thus consumer autonomy, would be squeezed out of the equation as private firms would exit the industry due to the government outcompeting them. In other words, taxpayers would lose out on having other options to file their taxes. If this happens, there is a fear that companies might retaliate. Industry giants would “have every reason to run an ad that says Big Brother is going to be watching your keystrokes,” as Steve Ryan, then general counsel of the Free File Alliance stated on National Public Radio. He continued by asking if “we really believe that that sort of advertising or program would actually be beneficial to electronic filing? In this instance, not only would the tax filing industry face the danger of collapsing, but taxpayers would also suffer by not having the freedom to choose the service they want. 

It is unknown how well-founded these fears are, however. Although reported in 2011, data collected from the CFTB states that 97 percent respondents stated that filing is the type of service the government should provide and 98 percent stated that they would use this service again. Providing a free online tax filing system is also recognized as public service at its best and provides efficiency and convenience to the tax filer. Finally, a working paper for the National Bureau of Economic Research found that autofilling tax returns could be straightforward for many filers, with 41 to 48 percent of returns able to accurately be pre-populated using information from the previous year’s tax returns, and 43 to 44 percent of filers who would see their returns automatically filled are unnecessarily paying someone else to handle their filings. 

Another concern is more logistical. Both the IRS’s budget and staffing have shrunk over the past decades even as filings increased. This lack of personnel and increase in responsibility is also intensified by pandemic-era responsibilities, such as distributing stimulus checks and child tax credits. Consequently, there is a massive backlog of unprocessed tax returns and refunds—not insignificantly due to decades-old technology and the IRS’s insistence on using paper files. To create such an overarching system and then subsequently maintain it would require massive technological and organizational overhauls—overhauls that, given the IRS’s archaic technology and restricted funding and workforce, may overwhelm the IRS and create an even more catastrophic backlog in the short-term. The Inflation Reduction Act seeks to partially alleviate some of these pains by directing $80 billion toward the IRS, but it is unclear whether and how much these concerns will be addressed by this increase in funds. What is clear at this point, however, is that the IRS will start taking serious steps towards allowing taxpayers to file with the IRS. Hopefully, in the near future, taxpayers around the nation will be able to simply file their taxes every year, for free, within minutes.